6 reasons to pay a pension contribution before the end of the tax year
Pensions continue to represent an important and tax efficient way of saving for retirement and there are a number of reasons to consider making a payment, or additional payments, into a pension scheme before the end of the tax year. Consideration of whether to make payments is particular relevant given changes in recent years which can make it easier to access funds in a pension scheme.
It is important to note that no payment should be made without first taking specialist professional advice.
1. Obtain tax relief at higher tax rates
Whilst pension payments represent a way of obtaining tax relief for everyone they can be particularly beneficial to higher rate and additional rate tax payers giving relief at 40%. 45% or even 60%.
2. Make use of the annual allowance
There is an annual allowance for pension contributions, currently £40,000 per tax year which includes both employees (gross) and employers contributions. In addition, any unused allowance can be brought forward from the previous three tax years, provided the individual was a member of a pension scheme during this period.
The annual allowance however is reduced by £1 for every £2 that an individuals‘ adjusted income’ for the tax year exceeds £150,000, subject to a minimum allowance of £10,000.
For 2016/17 tax year, there is the possibility of a maximum allowance brought forward of £130,000 using unused allowances of £40,000 from 2015/16 and 2014/15 plus £50,000 from 2013/14.
In 2017/18 the maximum allowance that could be brought forward will reduce to £120,000, as all tax years will be at the £40,000 allowance.
3. Preserve child benefit
If an individual claiming child benefit, or their partner, has income in excess of £50,000 then a tax charge applies to claw back the child benefit given during the year, and for those with taxable income in excess of £60,000 the child benefit is completely removed.
Personal pension contributions however reduce ‘income’ for the purposes of assessing any child benefit tax charge, and so can result in the charge being avoided altogether. This can give an effective tax saving of up to 65% where a family has three children.
As an alternative the child benefit tax charge could be reduced by simply redirecting existing pension payments from the lower earning partner to the higher earner, rather than having to fund additional pension payments.
4. Alternative to dividends
Following changes to the taxation of dividend in 2016/17, business owners may find it more tax efficient to be remunerated in the form of pension contributions rather than as dividends.
Dividends are not tax deductible for Corporation Tax since they are paid out of profits after tax, and the recipient may also be liable to income tax on the receipt of the dividend. Employer pension contributions on the other hand are deductible in calculating a company’s Corporation Tax liability, and any tax saving could be used to increase the pension payment to the owner-manager.
If the individual is over 55, they may now have access to their pension savings.
5. Employer pension contributions compared to a salary bonus
Many companies will pay bonuses to employees around the end of the tax year. If the employer pays such a bonus in the form of a pension contribution rather than as part of the employees salary, then there can be a number of benefits to both the employer and the employee.
In particular there are no NI costs associated with an employer pension contributions, so this is a saving for both the employer and the employee.
6. Corporation Tax savings
Companies may wish to consider making pension payments before the start of April 2017 in order to achieve Corporation Tax relief at 20%, rather than when the Corporation Tax rate falls to 19% in April 2017.
For more information on any of the issues above please contact our pension advisor Mark Underwood at Muras Baker Jones Financial Services Limited. Mark Underwood can be contacted by email at mark.underwood@muras.co.uk or by phone on the number below.
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